## Facts

- Standor Jewelers West, Inc. operated multiple jewelry stores, including one under a retail lease at South Coast Plaza Mall in Costa Mesa, California.
- The lease provided that, as a condition to any assignment, the tenant had to pay the landlord 75% of the consideration paid by the assignee in connection with the lease transfer.
- After filing a Chapter 11 case, Standor sought to assume and assign the lease to Sterling, Inc.
- The landlord objected, arguing the debtor had to comply with the 75% payment condition and that the transaction price did not properly allocate value between the leasehold and other assets.
- The bankruptcy court treated the 75% clause as an assignment restriction and approved assumption and assignment free of that condition under 11 U.S.C. § 365(f).
- The landlord appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.

## Issues

1. Whether a lease clause requiring payment of 75% of assignment consideration to the landlord as a condition of assignment is an unenforceable restriction or condition on assignment under 11 U.S.C. § 365(f).
2. Whether such a clause may be enforced in bankruptcy on the theory that it is a state-law-valid allocation of lease appreciation between landlord and tenant.

## Decision

- The BAP affirmed the order approving assumption and assignment of the lease to Sterling.
- The BAP held the 75% recapture/profit-sharing clause was a restriction or condition on assignment invalid under § 365(f).
- The BAP rejected the landlord’s effort to claim a contractual right to capture the lease’s appreciated value through the assignment condition.

## Legal Principles

- Under 11 U.S.C. § 365(f), a trustee or debtor in possession may assign an unexpired lease notwithstanding lease terms (or applicable law) that prohibit, restrict, or condition assignment.
- A provision that requires the debtor to surrender a substantial portion of assignment value to the landlord as a prerequisite to assignment operates as a prohibited restriction or condition under § 365(f).
- Federal bankruptcy law preempts enforcement of assignment-restricting provisions even if they would otherwise be enforceable under state law.
- The debtor’s leasehold interest, including its market value and appreciation, is property of the estate; contractual devices that divert that value to the landlord via assignment conditions are ineffective in bankruptcy when they conflict with § 365(f)’s policy favoring assignability and value realization for creditors.

## Conclusion

The BAP held that § 365(f) prevents a landlord from enforcing a lease term requiring payment of 75% of assignment consideration as a condition of assignment, and it affirmed approval of the debtor’s assumption and assignment of the retail lease free of that recapture provision.


In re Standor Jewelers W., Inc., 129 B.R. 200 (B.A.P. 9th Cir. 1991)